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Is Amazon a threat to online retail in the U.S.?

Amazon has been doing battle with states over the collection of sales tax for years.

It has developed a strategy for dealing with states that propose legislation that would force it to collect sales tax as a result of its affiliate relationships: threaten to terminate affiliates in the state if the legislation is passed.

Sure enough, the e-commerce giant has consistently followed through on such threats. The result: Amazon affiliates either have to say goodbye to revenue, or flee to another state. And the states themselves don't generate any of the revenue they thought they were losing out on in the first place.

When California proposed legislation that would force Amazon to collect sales tax, Amazon didn't flinch simply because California is a large state that's home to some 10,000 affiliates. It terminated those affiliates.

But the story doesn't end there. Instead of going on with business as usual, Amazon cut a deal with the state: California will hold off on enacting its new law, and Amazon will start collecting sales tax on purchases made by California residents by 2013.

With a compromise in place, Amazon is inviting its California affiliates back. In an email, it tells former affiliates, "We are pleased to invite all California Associates whose accounts were
closed due to the prior legislation to re-enroll in the Associates
program."

Affiliates who come back into the fold won't have to change their IDs or account settings; Amazon preserved those. All former affiliates need to do is agree to the terms and conditions to re-enroll.

Obviously, this is good news for affiliates who remained in California and earned a substantial portion of their revenue from Amazon. But it's not clear whether Amazon's compromise will prove to be good news for anybody but Amazon.

Previous
case law makes it clear: a state cannot force an out-of-state retailer
to collect sales tax from its residents unless it has a presence in the
state.

So why did Amazon budge? There's one simple reason: even after severing affiliate ties, it was widely publicized that Amazon actually has several wholly-owned subsidiaries in the state. That would making claiming that it didn't have a presence in California very difficult.

End of story? Not quite.

As part of its deal with California, Amazon will team up with California and other states to push for a federal law that deals with the collection of sales tax at a local level. While it seems unlikely such a law would be a priority today, other online retailers should be wary.

Because it preferred not to sever all of its ties with California, Amazon is now effectively looking to create a system under which all online retailers have to collect sales tax in states in which they don't have a presence.

In other words, if Amazon can't have its way, other online retailers shouldn't be able to either.

That could prove to be bad news for other online retailers, particularly small online retailers. The reason: while a federal law might, in theory, make collecting local sales tax less painful than if there was no federal law in place, it will still represent the creation of new complexity and regulatory red tape for online retailers.

Complexity and regulatory red tape that, under current law, is not necessary. Amazon, of course, is probably the online retailer that has the greatest ability to deal with and absorb the costs of that increased complexity and red tape, highlighting the fact that Amazon's fight against affiliate taxes was driven far more by its interest in protecting its position than in protecting online retail.

That, of course, is not exactly a surprise, but online retailers that became used to the notion that Amazon was a reliable friend will need to quickly recognize that Amazon is now potentially a powerful foe.

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